Valero sees best quarter since 2005

An abundance of cheap domestic crude, including oil from the Eagle Ford and other booming shale plays, helped San Antonio-based Valero Energy Corp. post a profit of $1 billion in the last three months of 2012 — the company's best quarterly showing since 2005.

Valero stopped importing light foreign crude oil in the fourth quarter, replacing it with cheaper domestic crude at its refineries on the Gulf Coast and in Memphis. Most of those plants rely partly on crude from the Eagle Ford Shale in South Texas.

Valero CEO Bill Klesse said he expects more U.S. and Canadian crude oils to become available, so Valero is looking at ways to process greater amounts of domestic crude.

The company said it enjoyed high margins — the difference between what it pays for crude oil and what it earns from its fuels — in the final quarter of 2012 and for the year.

The company's Gulf Coast refineries were a standout last year, Valero President Joe Gorder told analysts in a conference call.

“Discounts were very strong. We had discount crudes coming in (and) in every form,” as the company processed more than 700,000 barrels a day of lower-cost domestic crude throughout its system.

“There's a lot of crude out there,” said Sam Margolin, an analyst and vice president at Dahlman Rose & Co. LLC in New York, and Valero is well-positioned to capitalize.

“When you no longer have to compete with China and India for crude — or any emerging market — the manufacturing margins change a lot.”

The amount of crude coming from the nation's shale plays, including the Eagle Ford Shale, “is definitely changing their world,” Margolin said.

But while discounted prices for light crudes “is the topic du jour,” Valero's strong fourth quarter “was just as much about heavy crude discounts,” said Stacey Hudson, senior research associate at Raymond James & Associates' Houston office.

The quarterly results exceeded analysts' estimates, as polled by Bloomberg News, that Valero would earn $1.20 a share in the quarter.

Valero's profit in the fourth quarter climbed to $1 billion from $45 million, or 8 cents a share, in the year-earlier period.

Valero's stock jumped $4.96 a share on the news, up almost 13 percent, to close at $43.77 in New York Stock Exchange trading.

For the year ending Dec. 31, Valero's profit fell slightly to $2.08 billion, compared with profit of $2.09 billion, in 2011. Included in the full-year results were noncash asset impairment losses of $983 million after taxes and an expense of $41 million after taxes, mainly related to the shutdown of the company's Aruba refinery.

Valero also said Tuesday that it had a “smooth start-up” of the largest project in its history: a $1.5 billion hydrocracker at its Port Arthur refinery. A second $1.5 billion hydrocracker at its St. Charles plant in Louisiana is expected to be completed in the second quarter.

Both units are designed to boost the company's production of distillates, especially diesel, which is in demand worldwide and for which margins are strong.

Valero now has the capacity to export 280,000 barrels a day of diesel and could boost that to as much as 425,000 barrels a day late this year or in early 2014, spokesman Bill Day said.

The company also is considering ways to move more crude to its Gulf Coast refineries by rail.

“We're looking at a lot of rail projects,” Gorder said, including projects to move crude by rail to its Quebec plant and to Memphis.

Valero already is transporting by rail more than 40,000 barrels a day of Bakken crude from Montana to its St. James terminal in Louisiana, where it goes by pipeline to Memphis, Day said.

Last week, the company said it plans to buy 2,000 rail tank cars, giving it 9,000 cars total, as part of a plan to serve areas where there are no pipelines.

Also Tuesday, Valero provided an update of the spinoff of its retail business. The new company, formerly named Corner Store Holdings Inc., is renamed CST Brands Inc. Eighty percent of its common shares will go to Valero stockholders in the second quarter, pending regulators' approval.

Valero expects to gain $1.1 billion in cash and incur a tax liability of $300 million, mostly in Canada, when the separation occurs.

Valero expects to liquidate the remaining 20 percent of CST's outstanding shares over an 18-month period.

“We believe the separated retail business will perform well and unlock value for our shareholders,” Klesse said.

The company also said its retail business had its second-best year ever, with $95 million in operating income compared with $83 million for the fourth quarter of 2011. Higher U.S. fuel margins led to the better performance.

The company's ethanol business reported operating income of $12 million in the fourth quarter, compared with $181 million in operating income for the last quarter of 2011.